DocuSign, Inc. (DOCU) Earnings Call Transcript & Summary

Great. Well, welcome, everybody. Good afternoon to all. I'm delighted to welcome DocuSign on the conference. We were lucky to have CFO, Cynthia Gaylor with us today. Cynthia, welcome. We really appreciate your participation in the conference. It's great to have you.

Terrific. Thanks, Brad. Great to be here. Thanks for having us.

Absolutely. Absolutely. So the format of this is the same. We -- I have a list of questions that we'll go through. And I'll leave some time at the end if there are questions from the audience. My web -- my chat function is not up. So if you want to get a question in, send it to my email. That's just [email protected], and I'll pick it up and we'll try to get your question at the end. So with that, let's just get started.

Cynthia, thanks again so much. Great to see you. Great to have you at the conference. Why don't we just start since last week, we reported a tremendous Q1 earnings. What are some of the key takeaways? How has the feedback been since the call? And what are some of the key highlights you'd like to point out?

Yes. Thank you. Thanks again for having us. Yes. I mean, we had a great quarter, a great start to the fiscal year coming off a super strong year last year. And so we were really pleased with the results. Top line revenue growth at 58%, $469 million of revenue for the quarter, which is pretty tremendous growth at scale. So we're really pleased with the results. We also hit some other milestones. We announced on the call, we hit our millionth customer. So we're really pleased about that. International revenue hit $100 million, just over $100 million for the quarter and 84% year-over-year. So that's one of our biggest growth opportunities going forward. And then I guess the other metric I would just highlight was 125% dollar net retention rate, which really just shows the kind of strength of our customer base, how customers are using our products and the value we're adding for customers in helping them along their transformation journeys.

That's great. And the growth is -- the remarkable thing is that most of this is coming from eSignature. The Agreement Cloud is early, eNotary is early, certainly big opportunities there. How do you think about just the addressable market, you mentioned your millionth customer already. But how do you think about the -- just in the core signature business, how big is that market opportunity? How well penetrated are you today? And where is the incremental focus from here?

Yes. Yes. We get this question quite a bit on our market opportunity. And the exciting thing is even at scale in our growth rate, the market opportunity is very large. So the way we think about it is our total addressable market is a $50 billion market opportunity, and about half of that, $25 million, is the eSignature market opportunity. The other half is the Agreement Cloud. So let me talk about eSignature a little bit. When you think about kind of our growth, and we talked about this on the earnings call last week, but a lot of our growth that we've been seeing, just given the scale of eSignature, we still see a lot of strength kind of in those growth rates and how customers are using our products on the DocuSign platform. And so we're really still at the early days. So even with $469 million in revenue in the quarter, the run rate that, that implies, we put out a guide just over $2 billion for the year. We're just in the early innings of a very large market that's quite fragmented, and we're the leader in the market, but we still have a lot of opportunity because a lot of our customers are still off-line. So the way they're currently agreeing is pen and paper. And once we see customers come onto the platform, they realize not only can they do it faster, easier, smarter, it costs a lot less money, there's a lot less friction. But it's just a very high ROI value proposition. So we're really excited that not only do we have a big market opportunity, but that we have a long runway and what we're really displacing is pen and paper. So we're looking forward to that.

That's great. And it seems there's a very powerful network effect in the business. More customers bringing in more transactions and the other side of the agreement brings in more customers, that flywheel effect that we see in the industry. Would you describe it that way? How is that manifesting in the business? And is that a key advantage, would you say?

Yes, for sure. So we do talk internally about kind of the network effect of our customer base. And really what it starts with is actually our digital business, right? Because a lot of -- digital really is the lead gen and kind of a lot of the brand recognition happens within digital. And those customers -- we have a land and expand model, so customers tend to start out small and then they expand over time. And that's why you see such strength in the net retention rate because we have a lot of new customers we're adding, they tend to come through digital and then they expand over time and become direct and their dollar rate of expansion increases over long periods of time. And we see that throughout all of our customer cohorts. So if you think about digital as kind of lead gen, we also have 1 million customers, but we have a lot more consumer users. And so that also creates -- everybody loves DocuSign, our customers love DocuSign because their customers love them for using DocuSign. And so when you think about just the opportunity from the smallest mom-and-pop businesses up to the largest enterprises, that also fuels kind of our growth rates and our addressable market.

Great. Great. No, thanks for that. And when you think about competition, if you do think of any real competition, is it primarily just that manual paper-based process? Are there any vendors out there that you're watching just in the core eSignature market? And as you get into more workflow automation with the Agreement Cloud, how does that competitive landscape change over time?

Yes. It's a really good question. So I think when we think about competition, it really goes back to what I was saying a couple of questions ago, just around the addressable market is so large. We're the largest player in the market there are other companies who do bits and pieces of what we do on the platform. But there's no one who offers kind of this comprehensive offering across the Agreement Cloud. So when you think about what companies are using and what customers could use our platform for, it's kind of the place to come to agree. So whether that's preparing, acting, signing, managing agreements, that is kind of the vision of the Agreement Cloud. So when -- there are other folks in the market who may offer eSignature, but is it as secure? Is it as scalable, right? Again, we go from the smallest to the largest enterprises, from an e-commerce company up until the biggest banks who have lots of other security and scalability requirements. And so other companies just haven't invested as much in the platform. I think the amount we've spent in R&D and innovation around the Agreement Cloud platform and eSignature is more than the next closest competitor has in revenue, right? And so if you think of just our investment over time, it's pretty tremendous and differentiating. So that doesn't mean we don't have competition, but I would say our biggest competitor is offline to online, pen and paper to a more automated way.

That's great. That's great. And when we think about eSignature, we think about a horizontal solution. And for the most part, that's the case. But there are different compliance standards that are built into here that are really under the covers, and there's a lot of complexity there. So could you elaborate a bit on what are those compliance -- some of those key compliance standards that are kind of built into eSignature? And how do you keep track and maintain those standards with all the changes in the regulatory bodies and requirements?

Yes. It's a key focus for us and also a key differentiator. So not only have we invested in innovation across the products and the platform, but also within different geographies, right, we're in 180 countries. We have 8 core markets from a go-to-market capacity perspective, a direct perspective. But we're in 180 different countries. And if you think about all of the different regulatory standards, not only within verticals, but within countries, it's a very important investment area and one that we focused on. So things like FedRAMP, we've made up a lot of investment. I've talked about that, kind of the IL4 pieces, the GDPR is really important, BCR. Those are some. But I would say a lot of the advanced standards that we need, we have. But it's constantly changing. So kind of staying ahead of that with our operations teams, our legal teams and our finance teams are quite important as well as like how we think about the go-to-market opportunity. So we feel really good about where we are. A lot of kind of our growth coming internationally is less about the regulations, and it's more around the people, process, culture in those different regions in terms of how agreements get done and really making sure that our products can address those.

Absolutely. No, that makes a ton of sense. And maybe we could shift gears to the extensive integration with third-party applications. That's obviously a key advantage you guys have as well. And it's kind of the dirty work in software. We take it for granted, all the API work. And for you, it's about that seamless integration with all these different applications in the front end. How have you -- what is it about the platform that makes it that extensible to these other applications? And how do you keep up with that?

Yes. It's a -- it's, again, a big investment area for us, right? So we have over 350 API integrations. And we think that's a differentiator because if customers are already using different applications and DocuSign is integrated into it, it just makes the set up time and the time to value much, much shorter and much more compressed. So it's a big investment area for us, both around product integration, but also around our partner and alliance teams. And making sure we're in those core applications that are within different customer sets, within different verticals, within different company sizes so that we become kind of part of the fabric of how work gets done within companies. And you can do that on DocuSign proper, but if they're already using different utility players and DocuSign's integrated into that, it just makes it much more seamless from a customer perspective and much more valuable in terms of them getting work done and seeing the ROI of that value proposition.

Absolutely. Absolutely. That's great. And when I think of DocuSign, I think of ease of use as well as another key advantage that you all have in the market. And that's another thing, I think, we often take for granted. Like that ease of use, there's a certain development philosophy that I think certain organizations have. And you seem to have that if we -- anybody who's used DocuSign can attest to that. And did I get that right? Is there a philosophy here and a confidence that is part of the culture of the development organization? And how do you -- how does that -- how do you continue to maintain that kind of ease of use focus?

Yes. I think ease of use is a good term for it. I think the way we talk about it internally is about delighting customers, right? And so that includes ease of use, it includes the security and the scalability, but the simplicity of the product in many ways, there's a lot of industrial strength that goes behind it, but the simplicity of what the end user sees and how they use the products is quite important. We've consistently had an NPS score above 70, right? So we have a very high NPS score, which I think is a tribute to that ease of use category, but probably the way we think about it is setting customers up for success. And the simplicity is an important component of that, but there's kind of a lot of depth to the product and innovation that needs to happen in order for it to come across to the end user that way, but also the functionality that's required beyond the signature and the extensibility of the platform and what we do across the Agreement Cloud.

Absolutely. And earlier in the call, why don't we shift gears to the dollar-based net retention, very strong. I think partially, that was due to elevated usage in the installed base, which speaks to your pricing model, the variable pricing model. Is that primarily what drove the record net revenue retention 125%, breaking through that historical range of 112% to 119%, really strong result there. I would assume that it's primarily more volume under the variable pricing model, if I'm getting that prompt, correct?

Yes. So I think what's driving that is consumption, right? And so each of the customer -- we look at all of the cohorts of customers. The most recent cohort would be folks who were customers, we look at customers who are customers this time last year, each quarter, right? And then we look at how they expanded over the course of the year. So I think that really speaks to how they're consuming the product, how they're using the product. It could be different use cases, it could be within different departments, it could be the same use case, but just a higher volume of it. And so we saw a lot of that, not only in the dollar net retention, but also in just kind of the revenue, the top line upside that we saw in the quarter, right? And we talked on the call last week quite a bit about early renewals and kind of that dynamic that we're seeing of customers who perhaps bought more conservatively and used beyond the capacity that they had bought, which I think gets to your dollar volume pricing model piece of that is really about -- we have a capacity based model. But when customers use beyond their subscription, we use that as an opportunity to renew or expand the customer.

Got it. Got it. Great. And with Agreement Cloud coming in now and some of these other offerings like eNotary, Insights (sic) [ Insight ], how should we think about the drivers of net revenue retention going forward? Obviously, the variable pricing model has driven a lot of that to date. But should we see that coming in more and more of that upsell opportunity in some of these newer categories? And how do you think -- how do you see that playing out in kind of the near and the longer term?

Yes. So what I would say there is we're in the early days of the dollar contributions of kind of the new products on the platform. And so the vast majority of our revenue and the vast majority of what you're seeing in the dollar net retention is coming from the eSignature products. Now what I would also say about net retention, in particular, the dollar net retention rate, is that, that denominator is becoming quite large, right? Just given the number of cohorts and the base given the scale of our business. And so in order to move that number either up or down, the numerator plays a big part in that, but the denominator is becoming bigger and bigger. So in any direction that it moves, it will move gradually, right? And we would expect, we said of our historical range to be at or above that range for the remaining remainder of the year. But it also -- we shouldn't expect it to move dramatically, we move more gradually quarter-to-quarter, certainly, but also year-to-year. And then you had a second part of that question?

Yes, just with some of the newer offerings coming in, should we think about the makeup of dollar-based net retention coming increasingly from newer products? Upsell, if you will, as opposed to cross-sell into more departments?

Yes. I think it's both, but I would say on the newer products, just given the strength of eSignature and the core, the majority of the dollars will be coming from that for the foreseeable future. And kind of tying it back to our discussion around the market opportunity and the TAM. When we think about kind of our path to $5 billion, right, I mentioned we guided to just over $2 billion for the year this past quarter. We could get to $5 billion in revenue with eSignature alone. We talked about that at the Analyst Day when we did kind of the deeper dive into the market opportunity. But the Agreement Cloud and the products around Signature are going to be really important to get us to that $10 billion opportunity, but also just the differentiation that our products and the innovation across the platform is going to be really important. So we're thinking very long term, and we're making those investments today. But in the top line itself, it will be a while before those become meaningful contributors.

Understood, understood. Thank you for that. And when we think about reopening, I have to ask the pandemic question. As we're kind of exiting the pandemic looking out to reopening, clearly, the pandemic has been an accelerant for your business and pulled forward a lot of trends in many ways. But as we think about reopening and we look towards that, how does the demand environment change? What are your views on that?

Yes. It's a great question. And if I had a crystal ball -- but what I would say is that we're really encouraged by the way our customers are using the product. And we believe that once customers come to the platform, they're not going to go back to pen and paper. That being said, we wouldn't expect these accelerated growth rates to last forever, right? We're -- we expect to grow -- to continue to grow at strong growth rates at scale, but we're just on a much -- off a much bigger base, right? So we expect our customers to continue to use the products. To use them in many different ways, some of which we don't imagine -- we had imagined they're using them today, but will in the future. And because we're so early in that addressable market and there's so much paper to not use on the planet, we think that this will just continue for a long time to come, and we'll continue to grow at very strong growth rates. They just might not be at the peak levels that we've seen, particularly as we become bigger and bigger dollar -- a bigger and bigger dollar base on the revenue side.

Got it. Great. Okay. And a record number of customers greater than $300,000 ACV, a great metric last quarter, and you've seen acceleration there last few quarters. I guess my question is, what does the typical cohort analysis look like? What does the customer typically start with in terms of the initial footprint? Is it a single department or 2 in these large organizations, in particular, in the large enterprise and how rapid does the expansion happen from one department to the next? Just any color on just the cohort analysis of kind of land and expand and the trajectory that that's on, please?

Yes. It's really interesting, and it's -- it may not be what folks would initially expect, right? But even large enterprises tend to start small with DocuSign. And it takes them a while to get into that over $300,000 cohort. So it really is a true land and expand. Some of our largest customers may have even come through the digital channel originally, and then they get up sold to direct, and it becomes digital churn. Dan talked about that a little bit on the call last week. So that's goodness for DocuSign and it's also goodness for the customer. Customers do tend to start out within one department, right, but there could be different use cases within the department. It could be multi department. So there's not really like one trend I would point to other than customers tend to start out small and then they expand over time. And they tend to not just do one large expansion all at once, it tends to be kind of a growing dynamic over time as they see value in the platform. And I think this last year is a great example of that where we saw accelerated consumption because folks were finding such value, right? What started out as an urgent need, then became a continued need as they used either more use cases or more documents within their organizations being signed, in particular electronically.

Great. Great. And international growth, revenue growth accelerated again last quarter. And you called out EMEA as an area of particular strength. Maybe if you could just comment, please, on some of the investments you've been making in EMEA, in the region and how that's impacting, how that's coming in now? Obviously, we're not yet reopened in Europe, but you're seeing real acceleration there. So just maybe the recent investments and how that's been playing out in the business?

Yes. And I might even, on that one, zoom out a little bit. I think we've been investing quite aggressively internationally, as I said, at the top of the meeting, at the top of our session. International is the biggest growth opportunity for DocuSign, right? We are -- we have -- it's 21% of our revenue today. Given the size of the company, I think most folks would agree that's a small percentage relative to other companies of similar ilk where maybe it's closer to 30%, 35%. And so we're looking to grow that aggressively. We're making investments across the globe, not only in EMEA, but also in APJ and Latin America. We've held out EMEA, in particular, because that has been an area where we've not only made investments both on the team side, in terms of the team, but also kind of in the operations of our business across EMEA. And then I would also say just in the execution and kind of bringing more rigorous execution and operations to that region. But I wouldn't necessarily single it out because from an investment area because we're really investing across the globe. And I think some of the investments that we've made in the past now are coming to fruition in these different areas.

That's great, that's great. And how is international different from U.S. from a compliance standpoint, from a content standpoint? Are you there? Is the product there already and you've been making steady investment there and in the go to market. And so maybe we shouldn't think about it as kind of an inflection point. It's just more of a ongoing traction that you're seeing there. But how would you classify just the differences in the product like the go-to-market between U.S. and international?

Sure. And that's a really good point. I would say it wouldn't necessarily be an inflection, but more like, hey, a lot of the investments are coming to fruition, it's kind of a gradual progression as we mature as a company. And we were probably late to expanding internationally and executing across the opportunity, right, just in general. So I think we're doing a nice job of kind of blocking and tackling and getting great traction around the around the globe. Internationally, there's always kind of the localization question. And that's another area where digital is really a great differentiator for us because digital helps us read the tea leaves of what countries, or regions, or subsectors could be great areas of high growth that we can put more, call it, wood behind the arrow to then supercharge those areas. Or how do you think about taking a country from digital to direct, right? What would be kind of the next few handful of core markets that we would go into. So I think digital is a strategic differentiator for us in terms of that localization and understanding different markets and where we might want to put more investment across the globe. But it's also kind of lead gen across the entire company, including our direct business. So I'd maybe think about it that way relative to -- there's localization and some of the things we talked about, localization not only of currency and language, but also the local regulations and things like that, that we certainly need to consider. But I think where we -- we look to digital and we look to our leaders in region to really understand what's important in those markets and making sure we're investing around that to set those markets up for success once we decide to go into them.

That's great. And why don't we shift gears to just the Agreement Cloud. You guys have been delivering on a lot of new product coming out. It's either out or coming out shortly, Contract Lifecycle Management, Notary, Analyzer. There's a lot there. And it's exciting to see the footprint expand for the company. What are you most excited about when you think about all the different components that are there? These are all separate markets and addressable markets in and of themselves. So what are you most excited about kind of near term and then longer term?

Sure. The thing that I'm probably most excited about is we're just in such the early innings. And so really being able to shape and define a market is just a pretty unique opportunity, especially a market. When we talk about the Agreement Cloud, it takes our TAM from $25 billion to $50 billion, right? And if you think eSignature is fragmented and off-line, the Agreement Cloud is even more so, right? And the players are even smaller, who are entering that market. So the opportunity for us and our kind of first-mover advantage across that I'm pretty excited about. Again, I said eSignature can get us to $5 billion, but the Agreement Cloud will get us to $10 billion and beyond. And so making those investments and understanding not only the market dynamics, but meeting customers where they are in that journey across how do you become more agreeable? How do you agree anywhere, right? Which, again, I think, fits nicely into kind of where our strengths are, it plays to our strengths. So I'm very excited about the early days in helping define a market but also the tremendous growth opportunity that will provide us kind of well into the future as we think long term.

That's great. That's great. And when you think about the Agreement Cloud, is there a different go-to-market motion that's required there? Or is this just a simple upsell? You already know, and you already have an installed base for eSignature, it's such a natural adjacency that perhaps it's not a big stretch? Or do you think you need more of a consultative sale, more enterprise direct sales motion as you get into the broader footprint?

Yes. It's probably somewhere in between. It is tangential from a market perspective and even a customer perspective in terms of what they're doing. And if you think about an agreement, again, the prepare, act, sign, manage, right, all of those things are interconnected and tangential. However, the deeper you get into the AI pieces or the CLM pieces, there is a change management required at the customer -- on the customer side in terms of how they think about -- how they get things done organizationally. So I would say it does tend to be a longer process than Signature, but also within verticals, there could be more complexity, right, in terms of the -- what a customer is trying to do and then how they want to get it done. And so I would say there is a consultative piece. We've invested a lot kind of in customer success and understanding how customers want to use the products, how do they want to use the platform, how you interconnect all the pieces across the agreement. But right now, we have -- our field is selling the Agreement Cloud, of which Signature is a critical component. And there is some more complexity, and we have experts within different verticals and things like that. But it is across the go-to-market initiatives.

Makes sense, makes a lot of sense. And Q1 operating margin, why don't we shift gears to margins, if we could, please. 20% well ahead of your guidance for 12% to 14%. And you noted that you would have liked for it to have been lower to continue investing in the business, understandably so given the growth you're seeing. Where are those areas you're planning to invest and what are some of the gating factors to doing so?

Yes. Yes. I mean, we had really strong operating margin, and we would have liked to see it lower. It's just really hard when you see that much upside in quarter to invest it, reinvest it in quarter. So we're looking for those opportunities to put that that upside to work because we do think about this as a very long-term opportunity. I think the areas -- and we talked about these a little bit last week, is really making sure we're building out capacity for the scale we're at from a go-to-market and a sales perspective. That's kind of a cross-sales and marketing last year. We built out capacity to meet demand, right, demand outstripped the capacity that we had. So we made a ton of investments across sales and marketing last year, but coming into this year, continuing to invest at pace, given the scale of the underlying base is really important to continue to build out capacity for the future. The other area is really about innovation and kind of within our product and our R&D teams and making sure we're continuing to invest in the platform. And connecting the platform for our customers and continuing to innovate ahead of the curve across the Agreement Cloud. And then the third area I talked about a bunch on this call, but just the customer success piece, right, and setting our customers up for success and supporting them as they grow with us. And so customer success is another big area of focus.

That makes a lot of sense, just given the net revenue expansion that you've seen. Great. And if we were to dive into some of the sales and marketing investment, the enterprise segment, commercial and very small business. Where is the focus there? Is it pretty broad across the different segments? Or is there a focus, an outsized focus, in one versus the other?

I mean, we're investing across the go-to-market effort, right? And so you have kind of the small business, you have digital as well, which is another business -- another big investment focus for us. So I would say it's across our go to market. I wouldn't highlight any one area because they're all important, similar to growing internationally, right? And so I'd probably say, we're making sure that we're making the right investments in capacity, not only across size of customer and those segments you mentioned, but also within geographies, right? Like what are the -- what is the go to market, whether it's sales capacity, support and success or the product innovation that needs to happen. So it's kind of we're looking across the base of what's required to continue to grow at these rates, continue to invest in our customers, and that's what we're really focused on.

Makes a ton of sense. Then last one, Cynthia, I know we only have a couple more minutes here. And thank you so much. It's been great. Yes, just on billing seasonality. In prior years, you've seen a more back-end loaded, typically a more seasonally strong Q4. This is less pronounced last year. You talked about on the earnings call, such a strong Q1 doesn't necessarily mean you're pulling business forward. And you think you're going to see a more linear year? Or what does that normal seasonality look like from here? Is it less back-end loaded than in the past?

Yes. And we've looked at this pretty carefully. I think it's probably too soon to tell, right? On billing, specifically, I would just remind you, looking at trailing 4 quarters is really a better metric than looking at any one quarter. And if you look at our trailing 4 quarters, whether our actual performance or including our guide, the same holding true for what we said last quarter and the quarter before, that trailing 4 quarters is really -- is more indicative if you were to look at the billings metric. But we focus more on the revenue and the revenue growth. We understand why billings is important. But I also -- quarterly billings can have fluctuations due to a variety of factors. There's just more variability in that. And so -- which is really encouraging. You look at trailing 4 quarters and it's been pretty consistent every quarter, and I think it also smooths out some of that seasonality that can happen. So we're not -- I don't want to make a prognostication around the seasonality, particularly, because we really do look at that metric, in particular, on a trailing 4-quarter basis.

That makes a lot of sense. Well, great. Well, Cynthia, thank you so much. I really appreciate you being here participating in the conference. Great insight. I learned a lot, and look forward to having you again next year.

Terrific. Thanks, Brad. Really appreciate it. Thank you.

Thanks again.